File photo of the Federal Reserve building.  (Photo: Reuters)
File photo of the Federal Reserve building. (Photo: Reuters)

With the Fed cutting rates again, growth stocks may remain in vogue

  • Investors are betting on assets that outperform in the backdrop of low growth and low rates over value assets
  • Growth stocks may remain in favour as the US Fed is obliging the stock market with yet another 25 bps interest rate cut

Mumbai: Rising uncertainty around the global economy has prompted equity investors world over to bet on growth stocks. So far this calendar year, the MSCI World Growth Index has posted returns of 22%, double that of the MSCI World Value Index.

Bank of America Merrill Lynch’s latest fund manager survey revealed that investors showed modest improvement in risk appetite and continued to add exposure to growth sectors. In simple terms, investors are betting on assets that outperform in a backdrop of low growth and low rates over value assets - those geared toward rising interest rates and earnings, analysts at the brokerage said .

“Fund managers remain overweight assets that outperform in a backdrop of low growth and low rates and have not shown signs of a rotation into value assets," they wrote. Further, only 7% of respondents expect value stocks to outperform growth over the next 12 months.

Now with the US Federal Reserve obliging the stock market with yet another 25 basis point (bps) interest rate cut, growth stocks could remain in favour. One basis point is one hundredth of a percentage point.

While expectations that the central bank could opt for one more rate cut at its upcoming policy meeting in October have risen, the majority view is that it will hold on to rates.

Brian Rose, senior economist Americas, UBS Financial Services Inc says, “The ‘dot plot’ which indicates where FOMC members expect rates to be at the end of each calendar year, showed the majority of dots suggesting no further rate cuts. We maintain our view that the Fed will go on hold until there is evidence that the economic recovery is in danger. However, the number of dots (seven) indicating one more move this year does suggest that it would not take much for the Fed to cut again," says his blog published on 18 September.

To be sure, although Fed members were divided on rate cuts, they seem confident about US economic growth and reduction in rates has come mainly due to the trade war.

So, analysts at DBS Group don’t see the market expectation of another cut this year as highly plausible, given the tension among the Fed's voting members.

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